The Instability of the Banking Sector and Macrodynamics: Theory and Empirics

56 Pages Posted: 23 Jun 2011

See all articles by Willi Semmler

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 4, 2011

Abstract

This paper studies the issue of instability of the banking sector and how it may spillover to the macroeconomy. The banking sector is considered here as representing a wealth fund that accumulates capital assets, can heavily borrow and pays bonuses. We presume that the banking system faces not only loan losses but is also exposed to a deterioration of its balances sheets due to adverse movements in asset prices. In contrast to previous studies that use the financial accelerator - which is locally amplifying but globally stable and mean reverting - our model shows local instability and globally multiple regimes. Whereas the financial accelerator leads, in terms of econometrics, to a one-regime VAR we demonstrate the usefulness of a multi-regime VAR (MRVAR). We estimate our model for the US with a MRVAR using a constructed financial stress index and industrial production. We also undertake an impulse-response study with an MRVAR which allows us to explore regime dependent shocks. We show that the shocks have asymmetric effects depending on the regime the economy is in and the size of the shocks. As to the recently discussed unconventional monetary policy of quantitative easing, we demonstrate that the effects of monetary shocks are also dependent on the size of the shocks.

Keywords: Banking crisis, financial accelerator, financial stress index, macrodynamics, Multi-Regime VAR ( MRVAR)

JEL Classification: E2, E6, C13

Suggested Citation

Semmler, Willi and Mittnik, Stefan, The Instability of the Banking Sector and Macrodynamics: Theory and Empirics (February 4, 2011). Available at SSRN: https://ssrn.com/abstract=1871043 or http://dx.doi.org/10.2139/ssrn.1871043

Willi Semmler (Contact Author)

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics ( email )

Olshausenstr. 40
Kiel, Schleswig-Holstein 24118
Germany

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Akademiestr.1/III
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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